Corporate Governance: SEC under fire on executive comp

Resurgent House Democrats are on a collision course with the Securities and Exchange Commission over the need for restrictions on corporate executive compensation - an issue Republican lawmakers managed to keep bottled up despite repeated reports of corporate pay abuses during the last Congress.Leading the charge for reform is corporate America's worst congressional nightmare: Massachusetts Democrat Barney Frank, who has long championed legislation to force the SEC to take a stronger stance against excessive compensation for boardroom big shots.

One of Frank's first acts as chairman of the powerful House Financial Services Committee was to express disapproval of new SEC rules that he said would loosen the already lax reporting requirements for executive compensation by public companies.

Although he said that initially he had been encouraged by the SEC's efforts to promote more disclosure, Frank called the new rules a particularly disappointing example of regulatory "slippage" by the agency.

Those new SEC regulations are designed to align the commission's rules governing disclosure of stock-option compensation with those of the Financial Accounting Standards Board - a change that SEC Chairman Christopher Cox said would make it easier for companies to prepare and for investors to understand such disclosures.

Frank, however, was having none of it. "Backtracking by the SEC on this important matter of stock options reinforces my determination that Congress must act to deal with the problem of executive compensation that is now unconstrained by anything except the self-restraint of top executives, a commodity that is apparently in insufficient supply," he said.

His outrage escalated following the disclosure of the termination deal offered to outgoing Home Depot CEO Robert Nardelli. "The action of Home Depot's board to simultaneously dismiss Nardelli and provide him with $210 million in severance is further confirmation of the need to deal with a pattern of CEO pay that appears to be out of control," Frank said.

As a back-bencher on the committee during the last Congress, Frank repeatedly pressured the panel to mark up his corporate compensation reform legislation in order to bring the bill to the floor for a vote. Now, as chair, he is expected to move quickly forward on an executive pay reporting package that could go even farther.

A ROLE FOR AUDITORS?

Although the new legislation was still being drafted at press time, independent auditors are likely to be called on to play an expanded role in verifying a variety of difficult-to-substantiate compensation schemes, including "Cadillac" health benefits for the families of retired CEOs, and the "golden hello" packages used to attract top executives.

Additionally, the legislation is expected to include provisions granting shareholders a right to review and veto compensation arrangements that they consider "abusive" or "self-dealing."

While the bill is not likely to set restrictions on compensation levels themselves, it will direct the SEC to develop rules requiring far more complete disclosure of pay and perks for top execs, as well as disclosure of the performance levels or targets used to determine bonuses; separate shareholder approval of all executive termination compensation packages; mandatory clear and simple disclosures of executive compensation on all corporate Web sites; and reporting on the pay of additional top executives of larger companies.

The new measure is almost certain to include provisions for commission rules requiring companies to adopt policies for recapturing executive compensation that is subsequently found to be unjustified.

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